Education And State Fiscal Relief

Total approximately $177 billion

A prime purpose of the Recovery Act is to provide fiscal relief to the states, and it does so to a great extent through large transfers of funds for education and Medicaid. There are also substantial increases in funding for specific education programs.

Increase in Medicaid funding

$86.6 billion of the Act is devoted to increased aid to the states via changes in the Federal Medical Assistance Percentage (FMAP), which is used to determine the federal contribution to Medicaid costs in each state. Each state gets a 6.2 percentage point FMAP increases for fiscal years 2009 and 2010 and the first quarter of 2011. In addition, states experiencing high rates of joblessness get additional increases.

State Fiscal Stabilization Fund

$53.6 billion of the Act is designed to help states avoid tax increases or cutbacks in essential services during the recession. Of the total, $39.5 billion is designated for formula-determined educational block grants to enable states to maintain funding levels for both K-12 and higher education. Another $8.8 billion is made available to states for high priority needs, which may also include educational needs such as school modernization. The remaining $5 billion is reserved for state incentive grants that are to be awarded when states make progress on goals such as improving the distribution of teachers to high-poverty schools and enhancing assessments of students with disabilities and those for whom English is not their native language.

Education Grants

$10 billion in Title I-A formula grants to school districts to fund instruction for low-income children. Another $3 billion is provided for Title I-A school improvement formula grants.

Special Education Grants

$12.2 billion in formula grants under the Individuals with Disabilities Education Act (IDEA) for special education programs.

Classroom Technology

$650 million in formula grants to fund computer and science labs and teacher technology training.

School Construction Bonds

The Act authorizes the issuance of $22 billion in new school construction bonds for the construction, rehabilitation and repair of public schools. State and local governments are also authorized to issue $1.4 billion in Zone Academy Bonds for public schools located in empowerment zones and enterprise communities. The cost to the federal government in lost tax revenue on the bonds’ interest payments is estimated at $10.9 billion.

Policy Issues

In order to receive State Fiscal Stabilization Fund (SFSF) monies, governors must agree to provide new and expanded data on student, teacher, and school performance in their state. Some states with under- or disparately-performing school districts will be reluctant to expose this information. Other requirements that states must meet to receive SFSF funds are commitments to improve teacher quality, raise academic standards, intervene in failing schools, and carry out "other education initiatives." Most governors have quickly agreed to meet these requirements to protect funding of their public education systems, but a few (notably, Gov. Sanford of South Carolina) have objected to the education standards.

A number of states ran into difficulties with an ARRA requirement that state education budgets not be reduced below their FY06 levels. Many states had already passed budgets with severe cuts to education when ARRA was enacted. In all of these cases, state legislatures have amended budgets, reconvened to pass new education budgets, or the states have filed for waivers to exempt them from this requirement.

State education systems are facing severe budget cuts this fiscal year (with the exception of Montana, Wyoming, North Dakota, and West Virginia), but the formula to distribute SFSF education funds does not reflect current needs. Older allocation formulas were used to expedite the distribution process, resulting in disparate funding among states. Some states with no education budget problems are receiving more funding per student than states in need.

In a few states there has been controversy over the use of stimulus funds to deal with budget shortfalls, but in most of the country the infusion of money has been welcomed. A recent study by the Center for Budget and Policy Priorities demonstrates that the state fiscal stabilization fund is having the desired effect of "enabling states to balance their budgets with fewer cuts in public services that would harm residents and further slow the economy."